Canso Radio
Canso provides portfolio management services to Canadian institutional and private investors, specializing in fundamental research and security selection. These publications have been prepared by Canso Investment Counsel Ltd. and have been prepared solely for information purposes. Information in these publications is not intended to constitute legal, tax, securities or investment advice and is made available on an “as is” basis. Information in these presentations is subject to change without notice. Canso Investment Counsel Ltd. does not assume any duty to update any information herein. Certain information in these publications has been derived or obtained from sources believed to be trustworthy and/or reliable. Canso Investment Counsel Ltd. does not assume responsibility for the accuracy, currency, reliability or correctness of any such information. These publications may contain forward-looking statements. Statements concerning a fund’s or entity’s objectives, goals, strategies, intentions, plans, beliefs, expectations and estimates, and the business, operations, financial performance and condition are forward-looking statements. The words “believe”, “expect”, “anticipate”, “estimate”, “intend”, “aims”, “may”, “will”, “would” and similar expressions and the negative of such expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from current expectations. Viewers are cautioned not to place undue reliance on these forward-looking statements. While Canso Investment Counsel Ltd. consider these risks and uncertainties to be reasonable based on information currently available, they may prove to be incorrect. Please refer to the Canso website to view our source disclaimers at www.cansofunds.com/publications
Episodes
We were writing about the confused state of political and economic affairs in June and wondered, like the Marvin Gaye song title, “What’s Going On?”. We marvelled at how the financial markets were ignoring any bad news in their haste to move ever upwards in price.
We are starting to see more and more credit opportunities emerging. Even though default rates remain relatively low, the increase in distressed transactions points to increasing stress among highly levered companies as interest rates remain higher for longer.
"What’s Going On” was the plaintive refrain and title of Marvin Gaye’s 1971 hit song about the controversial Vietnam War and the resulting societal and political upset in the United States. His song of confusion and disappointment seems as relevant to us today. We look with trepidation on the political and social tumult around the world and wonder ourselves what is going on.
Like George W. Bush standing on the deck of the USS Abraham Lincoln in May 2003, the market appears to have hoisted the “Mission Accomplished” banner on this monetary tightening cycle. Risk premiums have dropped, borrowers have renewed access to capital and the percentage of economists predicting a recession has dropped considerably from the “100%” tally of not so many months ago.
The so-called experts who called for dismal markets in 2023 were nowhere to be found in the 2024 New Year prognostications. Happy days were here again, and nobody wanted to spoil the fortunes from soaring markets that had been handed to investors by saying anything remotely negative this time around.
Corporate bond markets raced higher in the fourth quarter as inflation continued to decline, labour market strength showed signs of moderating and Federal Reserve policymakers signaled their rate hiking efforts may be coming to an end.
Generations of finance students have been taught Efficient Markets theory, but we have always begged to differ. What happened in 2023 to the financial markets and the economy should give anyone pause about how efficient the financial markets really are.
It was a cruel summer in the bond market as interest rates climbed swiftly higher. Yields across both Canadian and U.S. government curves jumped, hitting levels not seen since 2007.
The early 2023 “Will They, Won’t They” and “They Should” bond market consensus of lower interest rate prognostication morphed into a mid-year and more pleading “Why Won’t They??” lower interest rates. It has now grudgingly grown into a more accepting but fatalistic “They Probably Won’t” consensus.
Canadians rejoiced the dramatic victory of Nick Taylor who became the first Canuck to win the Canadian Open since 1954. Meanwhile, Canadian bond investors are celebrating a victory of their own, with the return of positive real bond yields. Listen more in the July 2023 Corporate Bond Newsletter
Is 4% a better target than 2%? This debate should prove interesting. We have always said that more money is much more popular than less money.
Have central bankers done enough to get inflation under control? We believe that monetary policy and the credit cycle are powerful forces, but we suspect that things on the inflation front will be a lot more difficult than the fashionable market crowd suspects.
The year began with swift optimism. Equity markets quickstepped higher, while credit spreads swung tighter. Buyers lined up to purchase new bonds from both investment grade and non-investment grade issuers. In sequence, investors who were knocked down by one of the worst years of their careers bounced back up and danced.
We continue to see that inflation hopes are springing eternal in the world’s bond markets in the Spring of 2023. The bond market is moving manically between elation that nagging inflation has finally been vanquished, and fears that it has not. It depends on the day, the hour, or even the minute after an “important number” is released, but bond traders continue to focus on the Federal Reserve’s (Fed) next move. Even af...
The recent rise in Canadian bond market yields is something that bond investors have seldom seen in their professional lifetimes, and never for a sustained period. After hitting generational lows from 2010 to 2020 when central bankers became enamoured with ZIRP (Zero Interest Rate Policy) and QE (Quantitative Easing), there was nowhere to go but up for bond yields!
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